UK Order Nix Drags Raytheon - Analyst Blog

Before markets opened today, Raytheon Company (RTN), digesting the aftershocks of the recent cancellation of its U.K. e-Borders contract, reported earnings per share from continuing operations of 56 cents, less than half the year-ago quarterly earnings of $1.24.

The Zacks Consensus estimate was $1.19 for the reported quarter. Excluding the impact of pension adjustment (9 cents) and the U.K. e-Border Agency program termination adjustment (71 cents), EPS came in at $1.36 per share, compared to $1.22 in the year-ago quarter. Last week the U.K. Home Office cancelled the e-borders contract, citing late delivery and poor performance.

Operating Statistics

Revenues in the reported quarter fell 2% or $152 million to approximately $6 billion over the year-ago period, lower than the Zacks Consensus Estimate of $6.4 billion. Net sales in the reported quarter, however, were reduced by $316 million to account for the UK Border Agency program termination. Similarly, income from continuing operations fell 57% year over year to $212 million.

The cancellation of the e-borders contract was felt here, too, reducing earnings by $395 million. The company registered operating margin of 5.8% in the reported quarter compared to 12.5% in the year-ago quarter. However, margins were dragged down by 5.9% in the reported quarter due to the impact of the termination.

Raytheon reported total bookings of $5.9 billion for the quarter, compared to $7.6 billion in the year-ago quarter. The company ended the first half of 2010 with a backlog of approximately $36 billion compared with $36.9 billion at the end of fiscal 2009.

Segmental Performance

Integrated Defense Systems (IDS)

Integrated Defense Systems reported 1% higher sales year-over-year to $1.4 billion. IDS recorded operating income of $221 million compared to $205 million in the year-ago quarter. The increase in operating income was primarily due to higher international Patriot programs.

Intelligence and Information Systems (IIS)

Intelligence and Information Systems reported 42% lower sales of $472 million year-over-year. IIS recorded $329 million of operating loss in the second quarter 2010 versus $66 million of operating income in the second quarter 2009. The impact of the U.K. Border Agency program termination reduced segmental sales and operating income by $316 million and $395 million, respectively.

Missile Systems (MS)

Missile Systems reported 2% higher sales of $1.4 billion. MS recorded $164 million of operating income compared to $147 million in the second quarter 2009. The increase in operating income was primarily due to improved program performance.

Network Centric Systems (NCS)

Network Centric Systems reported 1% growth in sales year-over-year to $1.2 billion. NCS recorded $166 million of operating income compared to $170 million in the second quarter 2009.

Space and Airborne Systems (SAS)

Space and Airborne Systems reported 5% higher sales of $1.2 billion, primarily due to growth in its classified business. SAS recorded $171 million of operating income compared to $175 million in the second quarter 2009. The change in operating income was primarily due to a favorable contractual settlement in the second quarter 2009.

Technical Services (TS)

Technical Services reported 7% higher sales of $834 million, primarily due to continued growth in domestic and foreign training programs supporting the U.S. Army's Warfighter Field Operations Customer Support (FOCUS) activities. TS recorded operating income of $73 million compared to $53 million in the second quarter 2009. The increase in operating income was primarily due to improved program performance and higher volume.

Financial Condition

Raytheon ended the quarter with cash and cash equivalents of $2.4 billion, compared to $2.6 billion at fiscal-end 2009. Long-term debt also remained at the same level of $2.3 billion, identical with fiscal year-end 2009. The company generated solid operating cash flow from continuing operations of $400 million in the second quarter 2010, which included higher cash tax payments of $73 million. In the reported quarter, the company repurchased 8.6 million shares of common stock for $475 million.

Outlook

Raytheon adjusting for the loss of the English contract lowered its fiscal 2010 earnings guidance range from continuing operations to $4.00 –$4.15 per share from the previous guidance range of $4.75 – $4.90. The company also lowered its fiscal 2010 sales guidance range to $25.6 billion – $26.1 billion from the previous range of $25.9 billion – 26.4 billion. Raytheon, however, maintained its adjusted earnings guidance range of $5.13 – $5.28 per share.

We are currently Neutral on the Zacks #3 Rank stock.
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